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Nesting? You’re Not The Only One

nesting

As more and more people plow money into improving their homes, the question of how to pay for it is more important than ever

Like many people who are remaining mostly at home during COVID-19, I’ve noticed big changes in my spending patterns. Groceries, up. Restaurants (though I am doing my share of take-out) down. Comfy athletic-type apparel, up. All other kinds of clothes and shoes, down. Travel and transportation, way down. I can go a month on a tank of gas. But one thing I’m spending more on pretty continuously is the place I’ve been spending all of my time – my home. New sheets, towels, upgraded pans for the baking I’ve been doing. Yes, yes and yes. And it look like my home upgrades pale in comparison to what’s happening around the country.

A new survey from Bankrate.com revealed that nearly 6 in 10 homeowners have either already forked out at least $500 for upgrades to their homes or plan to do so before the end of the year. We’re talking new furniture, electronics, appliances, and the like. Millennials – the ones the Wall Street Journal recently credited with providing Opens a new windowmuch of the muscle for the recent housing rebound – are particularly buying into this trend. Three-quarters of them, according to the research, are all in for upgrades to their homes this year. And this isn’t the only evidence. Home improvement website Houzz said that the project leads they source for home professionals were up 58% year-over-year in June.

All of which begs two questions. How are we paying for these items? And how should we be paying for them? Let’s explore the options.

Cash-out refinance:

Home prices (particularly in many suburban locations) have continued to rise through the pandemic adding to the equity (or percentage of ownership) people have in their homes. According to ATTOM Data Solutions, there are now more than 15 million residential properties in the US with mortgages representing half (or less) of the value of the home.

When it works:

If you’re embarking on a substantial home improvement project, a cash-out refi is one of the best value-for-the-money ways to borrow. Yes, there’s a cost to any refi (and you want to be sure you’ll be in the home long enough to recoup your outlay through the smaller monthly payments that follow) but with 30-year-fixed mortgage rates at below 3% for people with excellent credit, these are terms that are hard to beat.

Home equity lines of credit and home equity loans:

The same forces pushing home prices higher and interest rates lower should benefit people in the market for fixed rate home equity loans and their variable interest rate cousins home equity lines of credit or HELOCs. However, HELOC loans may be harder to get because of high unemployment and other negative economic forces emanating from the pandemic resulting in a general trend of stricter lending criteria. The interest rates on home equity lines and loans – which are both forms of second mortgages – are higher than they are on primary mortgages.

When it works:

If you are intending to do your project over time, it doesn’t make sense to borrow all of the money at once. That is where HELOCs are most useful. You only borrow the amount you’re plan on using then start paying back that amount immediately. HELOCs are also great back-pocket emergency cushions in times of economic uncertainty. Home equity loans are for all-at-once projects where you don’t feel it is worth it to go through the process of a refi.

Credit cards:

Nearly one-third of the millennials surveyed by Bankrate are planning on using a credit card to fund their upgrades. With credit card interest rates averaging 19% (for people with good credit, for those with fair or bad credit rates are higher), however, this is a pricey way to pay for a purchase over time.

When it works:

If you know you are going to pay for a purchase within 30 days of when you make it, or have a credit card with a 0% (or other really low teaser rate) it’s fine to use a credit card as a safe and convenient payment tool.

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